How US elections impact Indian stock markets

November 7, 2016 — INDOLINK Consulting (es)

Source: The Hindu Business Line, Nov 06, 2016

Tomorrow is D-day, when people in the United States will vote for the 45th President of their country.

Financial market analysts note that a victory for Donald Trump will usher in a period of uncertainty in economic, social and foreign policies. Equity and currency markets have turned turbulent as the gap between the two candidates narrowed in opinion polls.

A further decline in stock prices is possible if Trump wins while a mild rally is expected if Hillary Clinton triumphs.

How will Indian equity and currency markets react to this event? We ran through the market moves following the US Presidential elections since 1992 to get the answer.

Strong short-term linkage

An analysis of the change in Sensex and S&P 500 values, one week after the date of the Presidential election, shows a very high positive correlation of 0.97 between the two indices. This means that Indian equities will sink or swim with their US counterparts in the coming week.

The extent of fall or rise could vary. In 2012, when Barack Obama won a second term, the S&P 500 lost 3.78 per cent in the following week. The Sensex, too, fell, but by a much lower 1.05 per cent.

In 2004, when George Bush won a second term, the S&P 500 gained 3 per cent in the following week. The Sensex, too, gained 3 per cent in that period.However the 2008 Presidential election during a bear market saw the S&P 500 and the Sensex declined by a sharp 10 and 7 per cent in the week that followed.

Medium-term divergence

The correlation between the S&P 500 and the Sensex comes down to 0.56 on considering the movement of the indices in the month following the election. The Sensex and the S&P 500 moved in opposite direction in four out of the six elections held since 1992.

A short-term impactAnother notable point is that the impact of the elections does not last long and the structural trend in the market tends to take over in Indian stock markets.

In November 2012, while the Sensex fell 1 per cent in the week following the election, it recovered to gain 3.56 per cent in the following month, helped by foreign investor buying.

Similarly after the 1996 election, Indian markets declined sharply in the following month, as the structural trend was down since 1994.

Foreign investment flows into India also do not appear to be influenced by these elections. Barring 2008, FII flows into the Indian equity market have been positive in the months in which US Presidents were elected.

Currency impact

The dollar’s position as the safe haven will stand it in good stead if there is a market crash following the election result. In 2012, when US equities fell, the dollar rallied 0.50 per cent in the week after the polls. The rupee declined 0.55 per cent in that period, hurt by a stronger dollar as well as the increased global risk aversion.

Similarly, in 2008, the S&P 500 fell 10.6 per cent in the week after the poll, the dollar rallied 2.8 per cent and the rupee declined 0.84 per cent. So, the rupee could be adversely impacted, at least in the short term, if Trump wins.